Global food products maker and distributor, Sysco Corporation’s (SYY - Free Report) first-quarter fiscal 2017 earnings exceeded expectations while revenues were in line with the same. The acquisition of London-based Brakes Group (completed in July) and margin improvement probably drove the earnings beat.
Adjusted earnings (excluding restructuring and merger-related costs) of 67 cents per share surpassed the Zacks Consensus Estimate of 59 cents by 13.6% and were up 28.8% year over year.
Growth in sales, expense management, and improved gross and operating margin led to the upside. Excluding the Brakes acquisition, earnings increased 21.2% to 63 cents per share.
Quarter in Detail
Sysco's sales of $14.0 billion were in line with the Zacks Consensus Estimate and increased 11.2% on a year-over-year basis in the first quarter of fiscal 2017. Excluding the Brakes acquisition, sales rose 1% to $12.7 billion.
Gross profit improved 20.3% to $2.7 billion in the quarter, while gross margin improved 146 basis points (bps) to 19.3% backed by the company’s ongoing growth strategy, which focuses on accelerating sales, reducing costs and mitigating ongoing gross margin pressure. Excluding the Brakes acquisition, gross profit increased 70 bps to 18.5%.
Adjusted operating income also rose 23.8% in the quarter to $626.8 million despite a 19.3% increase in adjusted operating expenses. Adjusted operating margin improved 46 bps to 4.49%. Excluding the Brakes acquisition, operating income was up 15.3%, while margin expanded 57 bps to 4.6%.
Owing to the completion of the Brakes acquisition, the company will now report results based on four operating segments: the two largest of which are U.S. Foodservice Operations and International Foodservice Operations.
U.S. Foodservice Operations
Segment sales inched up 0.8% to $9.5 billion, driven by higher case volumes. Gross profit increased 4.3% to $1.9 billion, while gross margin expanded 68 bps to 20.2%. Adjusted operating income was $745 million, up 8.4% from the year-ago period, despite 1.8% higher operating expenses.
Case volume for the company’s U.S. Broadline operations grew 1.8% during the quarter. Local case growth within U.S. Broadline operations was up 1.9%.
International Foodservice Operations
Segment sales for the first quarter surged 92.9% to $2.7 billion. Adjusted operating income increased 92.6% to $104 million. The significant improvement in both sales and operating income is primarily attributable to the Brakes Group acquisition.
Other Financial Updates
Cash and cash equivalents were $759.9 million as of Oct 1, 2016, compared with $3.9 billion as of Jul 2, 2016. Long-term debt at the end of the first quarter was $7.84 billion, compared with $7.34 billion at the end of the preceding quarter.
We are impressed with the fact that Sysco has delivered higher gross margins for the last six consecutive quarters, after witnessing declining gross margins over the last two fiscal years due to multiple factors. It seems that the company’s growth strategy is paying off and its efforts to boost sales and margins are bearing fruit. The company’s sales have also improved consistently, driven by acquisitions and volume growth.
Sysco holds a Zacks Rank #2 (Buy).
Some well-positioned food stocks in the industry include The Kraft Heinz Company (KHC - Free Report) , ConAgra Foods, Inc. (CAG - Free Report) and McCormick & Company, Inc. (MKC - Free Report) . All these stocks hold a Zacks Rank #2. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
While Kraft Heinz has a long-term earnings growth rate of 19.54%, ConAgra and McCormick have a long-term earnings growth rate of 8.82% and 9.00%, respectively.
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